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What Is Deferred Interest?

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Have those in-store "buy-now-pay-no-interest" credit card advertisements caught your eye? You might be wondering, "What is deferred interest, exactly?" If so, you're not alone: these financing deals are remarkably popular. But if you're not careful with the fine print, you might end up with a bigger bill than you bargained for.

That's because, unlike true 0% intro APR credit cards, most of these retail credit cards are actually deferred interest cards. They work similarly, except for a tricky catch: if you don't pay off your purchase in full by the end of the promo period, you'll be charged interest retroactively for the entire period. It's as if you'd never gotten a 0% intro APR offer at all.

What is deferred interest?

Some stores sell items that are hard for people to afford without saving up for -- it's not easy to buy a $1,500 washer/dryer set out of pocket, after all, or a $2,400 MacBook. So these stores came up with a creative option: a deferred interest card.

It works like this: you apply for the deferred interest credit card (typically in-store; often at the cash register) and if approved, you can put your new purchase on the card. You'll get a certain number of months in which you won't be charged any interest, known as the promo period.

If you pay off the purchase in full by the time the promo period is up, you won't be charged any interest at all. But if you have any balance left from that purchase -- even as little as $0.01 -- you'll be slapped with all of the interest you would have paid. This could work out to a charge of several hundred dollars or even more, depending on how the interest added up during the promo period.

This will be added back to your balance, and you'll have to pay it off as well. So while you may have thought you were saving money, you really weren't. It's just added on at the end, unless you pay off the whole charge in time.

Example: Buying a MacBook with a deferred interest card

Let's look at an example. Let's say you bought that shiny new MacBook for $2,400, and you put it on a deferred interest card at 25.24% APR with a 36-month promo period. Each month you'd still have to make a payment, which would go straight toward the balance of your card, rather than going to pay interest.

That doesn't mean you get off scot-free with no interest payments forever, though. Instead, the company will silently tally up what you would have paid. If you don't pay off that MacBook by the time the 36-month period is up, the company will tack on all of those missed interest payments to your balance.

Depending on how you paid down the card when you had the chance, that could be a several hundred or even thousand-dollar slap in the face.

Which credit cards offer deferred interest?

You'll see deferred interest credit cards most often at retail stores that sell high-priced goods -- places like Home Depot, Best Buy, and Sears.

It's not always easy to tell the difference between deferred interest credit cards and true 0% intro APR credit cards. Both of them may be advertised as "special financing" or "12 months financing," for example.

In order to spot these tricky offers, you'll need to read the fine print. Look for clues like "deferred financing" (it'll usually be in the very fine print) or "no interest if paid in full within 12 months." The key there is the "if" -- you won't pay any interest if you pay it off in full by the end of the promo period.

Want deferred interest? Check out The Ascent's Home Depot credit card review to see if it's the right card for you.

Benefits of deferred interest

Despite the deceptive tactics, there are times when it does make sense to use a deferred interest credit card.

Deferred interest credit cards are often easier to qualify for than other credit cards. If your credit isn't the greatest and you don't qualify for other options, using a deferred interest credit card to finance a much-needed purchase like a water heater or a washing machine can be a decent option -- if you'll use the card responsibly.

In addition, it can be an easy way to start building your credit -- again, if you use the card responsibly. As long as you pay the balance off before the end of the promo period, it's a good way to check off multiple goals at once. You can buy something you need, build credit, and get interest-free financing at the same time.

Drawbacks of deferred interest

Companies can be deceptive in how they advertise deferred interest cards. A lot of people are hoodwinked, and don't understand you need to pay off the charge in full within a certain period to see the savings. Even the Consumer Financial Protection Bureau (CFPB) has stepped up in recent years to try and get retailers to abandon these sneaky tactics.

That deception wouldn't be so bad, except for the fact that deferred interest cards are generally very expensive. They may not charge an annual fee, but the interest rates on these cards are often sky-high, and close to the upper range of what normal credit cards offer to those with the worst credit. Those high interest rates mean that if you end up being charged retroactive interest, it usually won't be a small amount.

Not having to pay any interest for a certain period of time can also lull you into a sense of complacency. Before you know it, that promo period will be up, and you might have to scramble to pay off the card or be slapped with a high interest charge you hadn't planned on paying.

Be careful about using your deferred interest card for further purchases

If you're still in the promotional period, it's best not to use your deferred interest card to make other purchases unless you've paid off the first purchase. That's because the interest-free offer only applies to your first purchase.

If you use your card to buy other things, those will be charged at the full interest rate right from the start. And because of the laws regarding how credit card companies are supposed to apply your payments, your money will automatically go to the highest-interest-rate balance first -- i.e., not the promotional purchase. So while you may think you're paying down your promotional balance, you might not really be.

The only exception is if you specifically ask your credit card company to apply the extra payment toward your promotional balance, and, even without that request, in the final two months before your promotional period ends. In those cases, any payments you make above the minimum will be applied to your first purchase.

Still, it's a hassle to remember and therefore a risk, so why take it? Just to be safe, set the card aside until you've finished paying off the first charge.

Is a deferred interest credit card right for you?

If you're considering a deferred interest credit card, it's smart to make a plan for paying it off before you make the purchase. Divide the purchase price of the item you want to buy by how many months you'll have to pay it off.

For example, if you want to buy a $2,000 couch from the Pottery Barn with a 12-month deferred interest card, check your budget to make sure you can afford a monthly payment of $167. Ideally, you'd want to pay more than that just to be sure you'll pay it off in time. You don't want to be diligently paying it off, only to have an emergency pop up and derail your plans. The sooner you pay it off, the better.

Deferred interest cards use sneaky language to trick a lot of people, but they're not inherently bad in themselves. If you know how to use them and you stick to your payoff plan, they can be a great help in sticky situations.

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